Oil

[marbs]

I got a sac in a few weeks, about the effect of Oil price rise on the economic objectives.

We need to relate it to a few economic objectives.

What economic objectives do you recommend relating?
How would I go about it? Is there any useful links?

[AppleXY]

Oil Prices is directly affects price stability (obviously ) , possibly efficient resource allocation amd Full employment (could)

[costargh]

Price stability is the best one to focus on if you had to choose one

This MIGHT be helpful
Watch the videos

http://news.sbs.com.au/insight/

[marbs]

Thanks cost and apple.

Price Stability seems an obvious one, and something easy to find info on...

I'm also considering full employment and eco growth

[AppleXY]

Lowered economic growth and lowered price stability are the main two direct effects of higher crude oil prices.


It indirectly affects Full Employment and efficient resource allocation (minimises efficiency, less output, resources are not used to their maximum due to inflated crude oil prices).

[chid]

could discuss full employment

Since oil is a key input in the production process, rising prices may cause firms to direct fewer resources towards wages/salaries.

[marbs]

This is what I have for Price Stability so far... Thoughts? How can I improve on it.

Price stability is about keeping the sustained increase in the general price level to an acceptable minimum, defined as 2-3% on average over the business cycle. Its main concern is inflation - which is a rise in the average value of a basket of goods and services. Part of the governments objective is keeping inflation low, which will help other objectives including economic growth and full employment. Recently the price of one barrel of crude oil has risen from $US 20 in 2001 to the recent figure of $US 130. In 1990 Australia’s inflation rate was over 5%, which was aided by the increase in the price of oil which was at $US60 double the average for the period, these two can be directly linked. The reason oil price was high because of the Gulf War in 1990. As a result of the Iraq War and other factors including supply constraints, the oil price has risen, and inflation is back on the rise. Increasing steadily to nearly 4% in 2006, now in March 2008 the rate is 4.2%. As a result of the increase in the price of oil, and increase in inflation, the RBA has risen Interest Rates to 7.2% in a bid to slow inflation. High interest rates attempt slow inflation,by slowing down consumption spending, in turning slowing down aggregate demand, finally slowing down economic activity.

[costargh]

Looks the goods (Y)
But I'd change

Part of the governments objective is keeping inflation low, which will help other objectives including economic growth and full employment.

to something like

Part of the governments objective is keeping inflation within this 2-3% range which will help in the achievement of other government objectives such as economic growth and full employment.

Also, just wondering. Which inflation rate are you quoting? Because I think it would make a difference whether you were using headline inflation or underlying inflation because I think if you were quoting the underlying inflation rate then your statements after that would be incorrect because the underlying inflation rate would already have eliminated the volatile price changes in oil which would be expressed in a lower inflation rate than that of the headline inflation rate (or at the value of oil would have less of an impact on the change in underlying inflation than it would to headline inflation)

Maybe someone else can clarify that what I have said is correct. Not sure

[Collin Li]

In perfect markets, the inflation of oil should not affect efficient resource allocation. It is more the other way around. An inefficient resource allocation causes an inflation (or deflation of oil).

When the oil prices are going up, it is generally going to be because it's moving towards the "correct" and efficient price. Oil is scarce, it's price is supposed to increase.

[marbs]

In perfect markets, the inflation of oil should not affect efficient resource allocation. It is more the other way around. An inefficient resource allocation causes an inflation (or deflation of oil).

When the oil prices are going up, it is generally going to be because it's moving towards the "correct" and efficient price. Oil is scarce, it's price is supposed to increase.

hey coblin would say mines correct when analysing the effect of an increase in oil price on price stability.

If there something missing when analsying the actual effort on the objective

[marbs]

Looks the goods (Y)
But I'd change

Part of the governments objective is keeping inflation low, which will help other objectives including economic growth and full employment.

to something like

Part of the governments objective is keeping inflation within this 2-3% range which will help in the achievement of other government objectives such as economic growth and full employment.

Also, just wondering. Which inflation rate are you quoting? Because I think it would make a difference whether you were using headline inflation or underlying inflation because I think if you were quoting the underlying inflation rate then your statements after that would be incorrect because the underlying inflation rate would already have eliminated the volatile price changes in oil which would be expressed in a lower inflation rate than that of the headline inflation rate (or at the value of oil would have less of an impact on the change in underlying inflation than it would to headline inflation)

Maybe someone else can clarify that what I have said is correct. Not sure

I couldn't find stats for 1990 in mr woods stats, so I found the stats from the New Zealand reserve bank, and others are from woods.

I think I am being too direct in saying the increase in oil price directly effects price stability... I think I might have too discuss the effect the increase has on productive resources, and transport, and how producers might have to increase their prices to account for their losses

[marbs]

This is how I said an increase in oil price effects full employment

Full Employment is a situation in which nearly all persons willing and able to work at the prevailing wage and working conditions are able to find employment. The goals is maintaining the rate as close to the N.A.I.R.U as possible. Recently from 2000 to 2001 Australia achieved relatively good unemployment rates when it decreased all but in 2002 and lowered from 6.4% to 4.6%. With the recent increase in the price of oil which has seen the price of a barrel of crude rise from $US 20 in 2001 to $US130 in 2008, the unemployment rate has begun to increase in the last two years with it now nearing 5%. With an increase in the price of oil it will cost producers more to produce some of their goods and services and the producers may pass this on to the consumers. The fear of higher inflation and the possible raising of Interest Rates, consumers confidence is likely to become lower. With lower consumer confidence, consumers spend less and this lowers consumption. Lower consumer confidence means less aggregate demand which means less economic activity. With less economic activity producers’ chance of making a profit decreases, and cyclical unemployment will increase.

[costargh]

Marbs, do you know whether you're inflation stats you used are underlying or headline inflation?

I think that would make a big difference

[marbs]

Marbs, do you know whether you're inflation stats you used are underlying or headline inflation?

I think that would make a big difference

they are both underlying

[AppleXY]

In perfect markets, the inflation of oil should not affect efficient resource allocation. It is more the other way around. An inefficient resource allocation causes an inflation (or deflation of oil).

When the oil prices are going up, it is generally going to be because it's moving towards the "correct" and efficient price. Oil is scarce, it's price is supposed to increase.

pfft. Every one knows oil is corrupted. Unnecessary pressure is coming from hedge funds speculating in the future markets of Crude oil price increases. In addition, the oil excise by the aust. govt just increases it even more.

It may work in pure free markets, but it's not pure in reality.